Chapter 1 Introducing the Economic Way of Thinking

Chapter 1 Introducing the Economic Way of Thinking • Key Concepts • Summary • Practice Quiz © 2004 Thomson/South-Western 1

What do the first two chapters do? They introduce you to a foundation of economic knowledge * Return to previous slide while in slide show mode 2

What is the economic problem? Providing for people’s wants and needs in a world of scarcity 3

What is meant by scarcity? The condition in which wants are forever greater than the available supply of time, goods, and resources 4

What does scarcity force us to do? It forces us to make choices 5

What are resources? The basic categories of inputs used to produce goods and services 6

What are three categories of resources? Land Labor Capital 7

What is a land resource? A shorthand expression for any natural resource provided by nature 8

What is labor? The mental and physical capacity of workers to produce goods and services 9

What is capital? The physical plants, machinery, and equipment used to produce other goods 10

What is financial capital? The money used to purchase capital 11

Land Labor Capital Entrepreneurship organizes resources to produce goods and services 12

What is entrepreneurship? The creative ability of individuals to seek profits by combining resources to produce innovative products. 13

What is economics? The study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants 14

What is macroeconomics? The branch of economics that studies decisionmaking for the economy as a whole 15

What is microeconomics? The branch of economics that studies decisionmaking by a single individual, household, firm, industry, or level of government 16

What is an economic model? A simplified description of reality used to understand predict the relationship between variables 17

What is the purpose of an economic model? To forecast or predict the results of various changes in variables 18

What are the steps in model building? • Problem identification • Model development • Testing a theory 19

Identify the problem Develop a model based on simplified assumptions Collect data and test the model 20

What assumption is always made when testing a model? ceteris paribus 21

What is ceteris paribus? A Latin phrase that means that while certain variables can change, “all other things remain unchanged” 22

What is the difference between association and causation? We cannot always assume that when one event follows another, the first caused the second 23

What is positive economics? An analysis limited to statements that are verifiable 24

What is normative economics? An analysis based on value judgement 25

Key Concepts 26

• • What is the economic problem? What is meant by scarcity? What are resources? What are three categories of resources? What is entrepreneurship? What is economics? What is macroeconomics? What is microeconomics? 27

• What is the scientific method? • What assumption is always made when testing a model? • What is ceteris paribus? • What is the purpose of model building? • What is positive economics? • What is normative economics? 28

Summary 29

Scarcity is the fundamental economic problem that human wants exceed the availability to time, goods, and resources. Individuals and society therefore can never have everything they desire. 30

Resources are factors of production classified as land, labor, and capital. Entrepreneurship is a special type of labor. An entrepreneur combines resources to produce innovative products. 31

Economics is the study of how individuals and society choose to allocate scarce resources in order to satisfy unlimited wants. Faced with unlimited wants and scarce resources, we must make choices among alternatives. 32

Society Chooses Resources Scarcity Unlimited wants 33

Macroeconomics applies an economy wide perspective that focuses on such issues as inflation, unemployment, and the growth rate of the economy. 34

Microeconomics examines individual decision-making units within an economy. Microeconomics studies such topics as a consumer’s response to changes in the price of coffee and the reasons for changes in the market price of personal computers. 35

Models are simplified descriptions of reality used to understand predict economic events. An economic model can be stated verbally or in a table, graph, or equation. If the evidence is not consistent with the model, the model is rejected. 36

Collect data and test the model Develop a model based on assumptions Identify the problem 37

Ceteris paribus holds “all other factors unchanged” that might affect a particular relationship. If this assumption is violated, a model cannot be tested. Another reasoning pitfall is to think association means causation. 38

Positive economics uses testable statements. Often a positive argument is expressed as an “if-the” statement. Normative economics is based on value judgments or opinions and uses words such as good, bad, ought to, and ought not to. 39

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